Agenda item

Councillor Ron Ower, Cabinet Member for Housing Company Development and oneSource Management, introduced the report

Cabinet was informed that the report sought the Cabinet’s approval to the establishment of a wholly-owned, arm’s-length company of the Council the purpose for which was to develop a portfolio of homes for market rent (its prime focus) and sale. 

It was proposed that the Council would dispose of assets (land/buildings) to the Company at market value for this purpose, for which it would receive a market payment.  It was proposed that the Company received state aid compliant loans and funding from the Council.   This would provide a long-term revenue stream for the Council in the form of interest payments from the Company to the Council.  The Company would operate in the same way as any other private-sector company, driven by the requirement to produce profits and to operate in a commercial manner.  The Council’s rights as a shareholder in the Company would be set-out in the Company’s Articles of Association and the proposed Shareholder’s Agreement.

The Council’s main objectives for entering into this market were:

·                To generate a financial return to the Council by operating a business;

·                To contribute to dealing with the housing supply issue in the borough which threatened the economic and social well-being of residents and was also a threat to the local economy.  It would seek to avoid large tracts of buy-to-let housing characterised by fragmented ownership, poor management of families from outside the borough, who might place unsustainable pressures on local services;

·                To ensure a mix of housing, in terms of type, size and tenure, best matched to the needs of Havering; and

·                To support the Council’s regeneration and growth aims, bringing forward high quality development on regeneration sites in key parts of the borough, notably - though not limited to - Rainham along the A1306, and Romford Town Centre.

London’s population was forecast to grow from 8.3 million in 2012 to 9.5 million in 2020.  Of this increase, one of the largest groups would be those in the 20 to mid-30s age bracket.  This group was the key rental demographic whose aspiration for home ownership might not be satisfied until much later in life.  There was now a growing demand from private sector tenants for quality, professionally-managed accommodation and this demand was likely to continue to grow. 

Several local authorities were venturing into this market.  These included: Kings Lynn & West Norfolk, Ealing, Waltham Forest, Enfield and Newham (through its Red Door Ventures).  Other institutions, such as Registered Providers, were also seizing on opportunities primarily focused on London and the South East.

The proposal to establish the Housing Company (HC) were based on a high level options appraisal conducted to determine the most appropriate means by which the Council’s objectives, as set out in paragraphs 1.1.2 to the report, could be met. 

The rationale for establishing the wholly owned Council Company was:

·           The Council had the power to on-lend funds to a company at commercial rates.  This was an attractive option as the Council would make a margin on its own borrowing from the Public Works Loan Board (PWLB) where interest rates were lower, pension investment funds or Council cash reserves.  The cost and returns for a proposed scheme were presented in the Exempt Part B of the report, which will follow when finalised.  This did not preclude the Council re-financing completed projects through commercial loans or having a mixed loan portfolio as the project matures;

·           In addition to generating a revenue stream for the General fund through interest from loans, revenue income would also be forthcoming from ground rent and dividend payments from the Company.  The Council would also benefit from any increase in value of the company’s assets;

·           Dwellings owned by the company were not HRA properties and thus would not impact on the HRA borrowing cap;

·           Dwellings owned by the company would be let on Assured Tenancies and, as market rented homes, would not be subject to the allocations provisions of Part VI of the Housing Act 1996 (which might have particular significance in relation, for example, to any prospective development for market rent);

·           Establishing a Company isolated elements of financial risk as the HC would be a limited entity;

·           Establishing a Company provided a flexible operating model to participate in the commercial market place; and

·           A Company vehicle could potentially extend its operations to wider trading functions related to housing development (subject to Shareholder approval).

Reasons for the decision:

The proposition met the objectives stated in 1.1.2 of the report and the outline business case contained in the Exempt part B of the report met the financial objectives of the Council within the MTFS.

Alternative Options Considered

A review of the alternative options of do nothing, seeking to undertake the proposition in the General Fund or through the HRA, or establishing a formal joint venture were either not feasible or did not fulfil the objectives to the extent of the preferred option as discussed in the report.

Cabinet:

1.            Agreed to the incorporation of a company limited by shares that would be wholly owned by the Council and delegated to the Director of Legal and Governance authority to take all necessary steps to establish the company.

2.            Delegated to the Leader of the Council and Cabinet Member for Housing Company Development & One Source Management, approval of the business case for and the Housing Company's (HC) first business plan.  In addition, the Group Director for Communities & Resources, following consultation with the Director of Legal and Governance, was authorised to approve the business case as being compliant with legislation, due diligence and being commercially sustainable.

3.            Agreed in principle to the disposal of assets (land/buildings) to the Company at market rates and delegated to the Group Director for Communities & Resources, following consultation with the Head of Property and the Director of Legal and Governance, authority to determine the principles and processes by which the said assets should be disposed of and the terms of disposal.  

4.            Agreed in principle to provide to the company funding through state aid compliant loans, subject to such funding being in line with the Council’s financial strategy.  It further agreed that the Leader of the Council and Cabinet Member for Housing Company & One Source Management following consultation with the Director of Legal and Governance would agree the Heads of Terms of the loan agreements, the negotiation and finalisation of the loan agreements, provided they were broadly consistent with the Heads of Terms, and the decision to release funding subject to satisfactory financial due diligence, to be delegated to  the Group Director for Communities & Resources.

5.            Delegated to the Leader of the Council and Cabinet Member for Housing Company Development & One Source Management, supported by a Senior Council Officer other than Group Director of Communities & Resources, to release funds through such loans needed to meet the requirements of the agreed business case.

6.            Delegated to the Leader of the Council and Cabinet Member for Housing Company Development & One Source Management, supported by a Senior Council Officer other than Group Director of Communities & Resources, the exercising of the Council’s rights as shareholder.

7.            Delegated to the Leader of the Council and Cabinet Member for Housing Company Development & One Source Management to agree to the Heads of Terms of the Shareholder Agreement and delegated to the Group Director for Communities & Resources, in conjunction with the Director of Legal and Governance, the authority to negotiate and finalise the Shareholder agreement.

8.            Delegated to the Group Director for Communities & Resources authority to approve the Articles of Association following consultation with the Director of Legal and Governance.

9.            Agreed to the establishment of the Company’s board consisting of the following Council officers, as well as an external, unconnected individual (to be recruited) who had relevant experience in the house-building sector:

a.         Group Director for Communities & Resources

b.         Head of Economic Development

c.         Head of Property Services, One Source.

d.         Assistant Director Business Services, oneSource 

10.         Subject to the final sign-off of the Business Case as specified in recommendation 2 and the Council and the company entering into the ancillary agreements referred to above, agreed that the Company might thereafter commence trading.

In addition, an appendix containing exempt information, detailing further Cabinet decisions.  This was made within the meaning of paragraph 3 of Schedule 12A of the Local Government Act 1972 as it was not in the public interest to publish.